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Monday, January 23, 2012

Crushing Debt

David Trahair’s book Crushing Debt is subtitled Why Canadians Should Drop Everything and Pay Off Debt. This led me to believe that the primary focus of the book would be the need for individuals to reduce their debts. However, to get to discussions of personal finance and debt reduction, readers have to wade through the first half of the book which is about macroeconomic factors related to debt. The book has some interesting parts, but overall it is a little thin on useful content.

“A financially illiterate, disorganized client is a bank’s most profitable customer.” The thought of giving my money away to a bank is a great motivator to get me organized and seeking financial knowledge. Trahair even claims that he once arranged to give a series of free lectures at a university, but the university’s “Financial Partner” put a stop to his lectures because “it would be bad for their business.”

“Household debt levels are threatening the stability of Canadian banks.” The McKinsey Global Institute looked at 5 sectors in each of 14 countries and found that among the 70 sectors studied, Canada’s household debt made the top-ten list of those with “the highest risk of deleveraging.”

Trahair says that in some cases, those who “brag about never carrying a credit card balance” are actually “using a line of credit to pay off [their] credit card[s].” With large line of credit balances, these people may be in worse shape that those with a small credit card balance and no line of credit.

One of the better parts of the book was the explanation of why the goal of being debt-free is important. “In a severe recession, everything bogs down. Stock markets tank and ... real estate will plummet too.” Your creditors will try “to collect the money owed to them like starving dogs looking for a bone. You don’t want to be the subject of their hunt do you?” The message here is that you should not be evaluating the riskiness of debt in typical economic conditions, but rather in unfavourable conditions like a recession or when interest rates shoot up.

Trahair served 6 years on the Board of Directors of Credit Canada. This translates into quite a good section on the three choices for help getting out of personal debt: Credit Counseling Debt Management Plan, Consumer Proposal, and Bankruptcy. The strengths of this section are helping you decide what route to take and what to expect from each choice. I would like to have heard more about potential pitfalls. I’ve heard stories about unscrupulous credit counselors, but I don’t know the typical ways that the bad ones exploit their clients.

“The vast majority of Canadians ... have no idea where their money is going.” I think most people would get some surprises if they saw a pie chart of how much they spend in various categories. Trahair gives some very detailed instructions on how to collect your transactions from your bank’s web site and compile them in a spreadsheet. Even novice spreadsheet users would have a chance at following his directions.